Using Home Equity for Home Improvement

Home equity loans are a great way to finance home improvements, and the bonus is that home improvements can increase your property value. These loans come in two forms – the traditional second mortgage, in which you borrow a lump sum and repay it in equal installments over a pre-determined term, or a line of credit, which allows you to draw funds as needed up to your pre-determined limit.

Second Mortgage

Choose your equity loan according to the type and scope of your project. Finance one-time projects like window replacement or a room addition with a fixed-rate home equity loan, which usually comes with a fixed rate that makes budgeting easier. Borrow the estimated project cost plus a bit extra to cover contingencies and cost overruns. Because you take the entire loan amount in a lump sum, you pay interest on the entire balance from Day One. That's why this might not be the best loan if you won't need all the money for some time.

HELOC

A home equity loan of credit (HELOC) may be your best choice for lengthy renovations involving multiple contractors and phases, especially if you don't have a solid cost estimate. HELOCs are divided into two phases – the drawing phase, during which you can tap the line any time up to its limit, and the repayment phase, when you pay the loan off but cannot withdraw any more money. You might, for example, have a five-year drawing period, followed by a ten-year repayment period.

HELOCs typically carry adjustable rates (although some allow you to convert them to fixed-rate loans once you have entered the repayment phase). You draw funds as needed and pay interest only on your balance (not the entire credit line).

Picking Your Projects

If you plan to keep your home for many years, plan home improvements according to your own taste and needs. If you're selling your home, choose projects geared toward buyer preferences in your local real estate market. Consult a real estate professional to learn more about which home improvements attract buyers.

The National Association of Realtors® recommends focusing on exterior improvements if you're selling your home. First impressions can make or break their decision to view your home. If you're keeping your home, you have more leeway for selecting improvements that meet your preferences. The ultimate man cave or a room dedicated to raising orchids may not be attractive to home buyers, but if you're in your home for the long haul, you can make preference-based home improvements.

Get the most mileage out of your equity loan by making home improvements most likely to generate a good return. While there are no guarantees on how home improvements will add to home value, the National Association of Realtors® says that adding a bathroom, updating your kitchen and adding energy saving features such as new windows and an energy efficient water heater. Finishing an attic or basement adds usable square footage to your home. If you're selling your home, knowing which improvements buyers in your area prefer is important. Home improvements can also depend on location. Buyers in Alaska likely won't appreciate an in-ground pool as much as those in Southern California.

When deciding to borrow against home equity, it's important to make affordable decisions. Equity loans and lines of credit must be repaid; the FTC cautions homeowners that failing to repay home equity loans can lead to losing your home.

It's easy to shop for home equity financing with free quotes from LendingTree's network of mortgage lenders. Comparing loan quotes side-by-side can help you find the best equity loan option for your needs.